November 17, 2016

Will gold coins overtake currency notes?

Gold coins will overtake currency notes in financing large black deals. This will hugely increase the demand for imported gold, causing balance of payments strains.

A 5g gold coin today is worth roughly Rs 15,000, and a 10g coin roughly Rs 30,000. So, a briefcase of gold coins will hold several crores, far more than a briefcase of Rs 2,000 notes. Portability and space reduction make gold more convenient for large deals. Bribes are often a percentage of project costs, and as the economy and projects grow bigger, kickbacks will too. Large payments will be done most conveniently in gold or dollars.

Gold is usable anywhere in the world. Not being paper, it can never be demonetised. Cash keeps losing real value because of inflation, but gold prices rise faster than inflation in the long run. If rising demand for gold induces the government to raise the import duty, domestic prices will rise correspondingly, giving a windfall to gold holders.

The value of gold fluctuates daily, creating valuation risks for hoarders. However, holding cash is not riskless either because it depreciates with inflation. Cash only depreciates, whereas gold coins can both depreciate and appreciate, mostly the latter. That’s why the future of black is gold.

Many naïve folk think demonetisation will deal a body blow to black money and shift India towards a clean, cashless economy. Sorry, but the benefits will be limited. Black money is both a stock (that is, a hoard of past untaxed money) and a flow (the constant generation of fresh untaxed income).